In Chapter 3 we have seen that bondholders perceive the statist left as riskier than their market-oriented counterparts – be they moderate or conservative governments – and react negatively whenever they anticipate a leftist victory in presidential elections.

This chapter focuses on the other side of the confidence game, examining the conditions under which investors' behavior influences the program advanced by newly inaugurated leftist governments.

In principle, there are numerous reasons why this behavior should be influential; a loss of market confidence raises the costs of funding, not only for governments but also for domestic banks and firms that have access to international markets, with trickling down effects that extend even to businesses whose funds are raised domestically.

Depending on its magnitude, a confidence crisis can turn into a speculative attack in which sudden and massive capital flight provokes a quick devaluation of the currency, leading to economic insecurity and inflation, and discouraging investment. For all these reasons, it makes sense that governments, regardless of their ideological leanings, do worry about a sudden loss of investor confidence.

Yet the analysis presented here demonstrates that, in Latin America, leftist governments' concern with a loss of creditor confidence is restricted to periods of dollar scarcity, in which there is a pressing need of attracting capital inflows. Leftist presidents inaugurated during currency crises often renounce their original program in favor of market-oriented policies aimed at restoring confidence.

In the absence of these crises, however, market discipline is less effective. Released from the necessity of attracting external funds, governments are afforded a wider room to deviate from investors' agenda. Leftist presidents not subjected to currency pressures are those most likely to actually promote a left-wing economic program.

CURRENCY BOOMS, CRISES, AND THE LEFT

As seen in Chapter 2, leftist presidents are different from their conservative counterparts, subject to conflicting incentives to advance their preferred agenda and at the same time attract investors that favor a market-oriented program.

This conflict is especially critical in unequal democracies; because redistributive policies boost the welfare of poor citizens in a way that economic growth alone cannot do, leftist governments are subject to particularly strong electoral pressures to pursue such programs.